Must the Macalope do everything?

The Macalope had thought the rather inconsequential business of Apple’s decision to charge for its 802.11n enabler was behind us, but two recent posts — one pro and one con — both manage to get it wrong, so he guesses he’s going to have to weigh in on the issue.

The Seattle Times’ Brier Dudley says:

…Apple said generally accepted accounting principles forced it to charge customers $1.99 for a software upgrade. Accounting standard-setters said that’s untrue.

(The Macalope may address the entirety of Dudley’s bone-headed piece in another post.)

Meanwhile, InfoWorld’s Tom Yager says:

Apple is required to charge you for the enabler. 802.11n was R & D intensive; it’s not your granny’s WiFi. You can’t amortize R & D costs against new products–in this case, AirPort Extreme and Apple TV–and then give that same R & D away somewhere else. That would create what’s called an accounting irregularity, and these aren’t popular at places like Apple and Dell just now. The only way to put 802.11n into existing Mac users’ hands was to turn it into a product against which R & D could be charged.

The Macalope knows what you’re saying to yourself. You’re saying, but, Macalope! Those can’t both be right!

(You do know the Macalope can’t hear you when you talk to your computer, right?)

So, mighty Macalope, was Apple required by GAAP to charge customers for the enabler or not?

(Still can’t hear you!)

No, technically it was not. Dudley’s statement is technically correct while Yager’s is technically incorrect.

But before you picket your local Apple Store, you should hear what Dudley jackassically fails to discuss, which Yager does get into. Because Apple’s decision suddenly makes a lot more sense when you look at what the cost to the company would have been to not charge for the enabler.

After apparently receiving some, ahem, negative feedback on his piece, Dudley defends his statement by indignantly linking to a Wall Street Journal piece and pulling a favorable quote. But he ignores one of the piece’s key grafs:

If Apple had given the enhancement away free, Apple’s auditors could have required it to restate revenue for that period and could possibly have required Apple to start in the future to defer all the revenue from computer sales until all such enhancements are shipped, this person said. That would have had a devastating impact on Apple.

Yes, Apple was technically incorrect in stating that it was “required” by GAAP to charge for the enabler. It could just have easily decided to reopen its books (for the second time in about as many months), taken a charge against prior earnings and potentially affected its future ability to recognize revenue when products ship. That sounds awesome, doesn’t it?

In addition to having a responsibility to its customers, Apple has one to its shareholders, and that option is clearly damaging to shareholders.

Ultimately, however, this whole thing is a rather absurd discussion. Are we really arguing over a $1.99 download? And since when did the Wall Street Journal have a cadre of reporters assigned to covering Apple’s accounting treatments?

Can we be done with it now?

Trackbacks Comments
  • John Muir:

    If the old rubric “all publicity is good publicity”, then Apple look stratospherically healthy. Loads of positive coverage, and a ton of negative stuff ranging from into the outer limits of jackassery which you so often dare to handle for yourself…

    But then again Enron, Apple in the depths of the nineties, and oh let’s say Saddam around the time he met his demise are all proof of the innate stupidity of that idea. Damn thee conventional wisdom! You keep coming back like a bad smell or Dvorak!

  • John Muir:

    Damn it, I’ve been typing too much today and zoned out beyond proof reading my comments before clicking submit.

    Read the above with your eyes focussed just *behind* the screen while in a newsroom far away, professional journalists crank screed about two buck downloads and the evil lock-in tactic Apple must surely be using, “just like they did FairPlay and the iPod!!!11!1!”

  • Apple’s just under heavier scrutiny than any other company woudl be because of us interweb folks. If Apple didn’t have the fanboy and anti-Apple following it did, this wouldn;t be a big deal.

    However, the Macaploe exists, all the other Apple sites exist and everyone who writes for newspapers has a Mac. So everyone is ultra sensitive when it comes to anything Apple related.

    Those who want the upgrade will buy it, those who don’t, won’t. And I will sit on my MacBook Pro wishing it was a Core 2 Duo rather than a Core Duo cursing the fact that I could have waited one measly month and gotten the new one.

  • In answer to the title… YES.. the Macalope MUST do everything! (but we thank you for your contribution to the greater good, believe me!)

  • So to summarise:

    Apple is not actually required to do charge. However it _might_ have had to reopen its books if it did not charge. Lets go with that for a second…

    Why then charge $2? Why charge non US customers? Why not simply charge a very nominal 10¢? Why not give it to customers as a reward for completing a product feedback form? Why not get an iTunes voucher for $2 in return?

    My issue with the enabler charge is not that it cost $2, it is that there seem to be a million ways for them to get this into the hands of their customers without charging. Yes they have a responsibility to their stock holder but at the same time making people who have forked over $1000 plus already pay for such a thing is damaging PR wise and it is exactly this sort of behaviour that gives Apple quite an arrogant reputation.

  • Publius Vox:

    Just think how much time, energy, $, kibbitzing, hemming/hawing, blogging, agogging, yammering, tax sheltering, lawyer & accountant billable houring, man/hours, and portion of the GNP goes to the insidious ‘cat & mouse’ game of ‘Revenue Assessment’.

    Sheesh! Enough! A FLAT 10% TAX, ONE TIME, AT THE POINT OF ORIGINAL SALE ! THAT’S IT ! THAT IS A-L-L THAT IS NEEDED ! Such a thing would cover ALL of known gov’t expenses as we know them TODAY!

    You don’t tax production! You tax consumption! The Founding Fathers had it right ! The neo-Socialists have it evilly wrong!

    How about instead some chatter about Apple’s 802.11n implementation ahead of the standard…

  • Ian Hobson:

    In reply to John Evans:
    “Why charge non US customers?”

    Apple is a US company listed on US stock market following US regulations including accounting. While it has subsidiary companies around the world, it’s worldwide revenues and profits are reported according to a set of rules laid down in the US (and much, much tighter due to things like Sarbane Oxley). Therefore revenue recognition is a global issue, not a US one. Apple is currently VERY sensitive (perhaps too sensitive) to following and interpreting rules very conservatively given various events at Apple and other companies (Dell springs to mind).

    And, yes, there would have been a million ways for them to do this, including charging a lot more. They chose the £1.99 route as one. They also bundle it with their new Airport Extreme, and perhaps it will also be bundled with Leopard, giving 3 ways to get it.

    Turning the argument around, do you not think Apple is smart enough to know that ANY price would cause an issue, and therefore that they have gone out of their way to do this for as little as possible while still in the spirit of the rules.

    Can we give up on this one and move on?

  • photon poet:

    “Why then charge $2? … Why not simply charge a very nominal 10¢?”

    Doesn’t it cost about two bucks for the payee to process a credit card payment?

  • MonkeyT:

    —Why then charge $2? Why charge non US customers? Why not simply charge a very nominal 10¢? Why not give it to customers as a reward for completing a product feedback form? Why not get an iTunes voucher for $2 in return? 

    There is a certain amount of overhead in generating and processing a purchase (mostly the labor and time involved in accounting oversight and properly resolving all the necessary record keeping.) Charging 10 cents is akin to accepting a payment of a quarter through a credit card – by the time all the entities involved in charging that card get their minimum fees, you’ve actually lost money on the transaction. If we all could walk through apple’s door and give them a dime, they’d still have to pay an employee to sit there and accept the fees, pay for paper and printers for invoices, as well as paying an accountant to reconcile the books.

    The case for making it a purchased product has already been stated. Below a certain price, a sale is just not worth the trouble. $2 seems an eminently reasonable compromise to me. Still charging for Quicktime Pro, however, is just pathetic.

  • Cheapskate:

    I see that 10 cents won’t cover transaction costs, but Apple sells iTunes songs at $0.99, so why they couldn’t do the network upgrade for the same price escapes me. Maybe it’s a different payment backend, or maybe Apple is really losing money selling music. Naaah.

  • Let’s also not forget that what is probably a large majority of people actually wanting the pre-N upgrade want it to use with their pre-N AirPort Extremes — which, of course, include the enabler in the box. Are there really that many people who bought third party pre-N hubs in the hope that they’d someday be able to unlock their MacBook Pros?

  • “I see that 10 cents won’t cover transaction costs, but Apple sells iTunes songs at $0.99, so why they couldn’t do the network upgrade for the same price escapes me.”

    I don’t know the specifics, but I would think that after paying fees to the labels for licensing the music and fees for the transaction, there can’t be much left to Apple’s share on a measly $0.99 sale in the iTMS.

    My guess from a marketing standpoint is that Apple doesn’t profit (or perhaps even loses a few pennies?) on a single $0.99 sale, but they’re banking on the statistical probability that a lot more people will be buying multiple tracks or whole albums at a time, making those sales much more profitable with the minimal processing fee taken out.

    That’s just my guess, though. Micropayments are still difficult to make both affordable and easy/interoperable with everyone.

  • Jackassically, that’s excellent. I must get that into print someday (as long as we don’t have to charge extra for that paper’s enhancement …). Thanks ‘lope.

  • To everyone talking about the ‘charges’ involved in processing a payment:

    Yeah it costs them some money, but not much. Here in Finland I can pay for €0.50 candy bar with a credit/debit card so the argument is a bit US biased (as usual) because the payment processing charges are not equally high everywhere. Again my point is that they could have given it away with everything else they sell like .Mac or something from the iTunes Store. The 10¢ comment was in line with going into an Apple store and walking out with the download code.

    “If we all could walk through apple’s door and give them a dime, they’d still have to pay an employee to sit there and accept the fees, pay for paper and printers for invoices, as well as paying an accountant to reconcile the books.”

    Umm, they already pay these people, have the stores and do email based receipts so that argument doesn’t work

    Cooner: Apple looses money on iTunes sales? Girlfriend please, even if we assume your right you still just admitted they will take a small nominal hit per song on a site that sells millions but wont take a hit on the hardware customers already forked over for. Again the argument doesn’t work.

    “They also bundle it with their new Airport Extreme, and perhaps it will also be bundled with Leopard”

    Yeah this is just great it comes free with a purchase of $180, I should be so happy about that right.

    Also might I remind people about when they shipped G rated cards. The spec was also not complete when they were first sold, but there was the promise they would be G rated at some point. Why did they not do the exact same thing this time? It strikes me like someone either messed up and customers paid or they planned it which is actually worse. This is exactly my problem with the situation. Apple did one of those two things and then thinks its fine to pass it onto its customers. If we assume Apple takes a $2 hit on each transaction (end to end) then we assume for every machine they shipped with an N card that applies then I think its safe to assume their profit margin on those machines is an order of magnitude more than the hit they would take.

    I just happen to think the good press they would have received if they just swallow the cost or were seen to be making the effort far out weighs the negative coverage this has received and the cost they might have had to swallow.

  • Yuda:

    John Evans:

    “Here in Finland I can pay for €0.50 candy bar with a credit/debit card so the argument is a bit US biased (as usual) because the payment processing charges are not equally high everywhere.”

    Just because you can charge that doesn’t mean the retailer isn’t taking a loss on the sale. Most credit cards prohibit retailers from having a minimum charge, so they have to deal with these occasional losses.

    “Cooner: Apple looses money on iTunes sales? Girlfriend please, even if we assume your right you still just admitted they will take a small nominal hit per song on a site that sells millions but wont take a hit on the hardware customers already forked over for. Again the argument doesn’t work.”

    Actually, what Cooner is saying is that, because Apple “bundles” all ITunes purchases in a 24-hour period before charging the credit card, they’re gambling that most users will buy multiple songs, thereby reducing the hit of the credit card fee.

    “Also might I remind people about when they shipped G rated cards. The spec was also not complete when they were first sold, but there was the promise they would be G rated at some point. Why did they not do the exact same thing this time”

    Because U.S. laws have changed in the interim, and they’d have to re-open their books now if they did that.

  • Yuda:

    On the first point; again if the shop will swollow such a cost why wont Apple?

    My point regarding Cooner assumed he was right and they do take a hit on iTunes purchases. I clearly asked how come they take a hit on a few iTunes sales and not on the enabler.

    I have to assume your last point is correct because the whole situation is so complicated. My understanding is that Apple has to charge because this is a ‘new’ feature added after the sale and thus needs to be a paid update for accounting reasons. My point was that surly if they just said this is an N rated card when sold then they would not have to charge anyone. Which is ironically what they did with the G rated cards. If someone can explain why that would not have worked please let me know

  • “Apple looses money on iTunes sales? Girlfriend please, even if we assume your right you still just admitted they will take a small nominal hit per song on a site that sells millions but wont take a hit on the hardware customers already forked over for. Again the argument doesn’t work.”

    If I’m right, the theory is that Apple is willing to risk taking a hit on selling a single $0.99 sale on iTunes because the odds are good that MOST individual users are going to buy several singles or albums at once or within a 24-hour period, allowing them to process a much larger amount with the credit card. They’re taking that hit to offer customers the convenience of being able to buy something without having to worry about a nimimum purchase, and hopefully convince them to come back later for a bigger sale.

    It seems highly unlikely that a single person is going to order a few dozen enablers within a 24 hour period, so there’s not really the ‘bring ‘em back for more’ incentive on this particular sale item.

    And while I’m only speculating here, I do know that credit card companies are not benevolent, charitable organizations, and they do charge processing fees. I worked for a store that wouldn’t sell cigarettes charged to a credit card because their profit margin was too low to take the sale. I find it hard to believe the credit card industry looked at Apple and said, “Wow, nifty little store you’ve got here. We’ll waive our processing fees for any order $5 and under.” Yeah right.

    Look, John, I’m not saying this whole thing isn’t a wonky situation. Maybe the $1.99 download will be a PR fiasco for them. Maybe there’s legal complexities here that we just don’t understand. Maybe Apple weighed all their options and decided this was the most middle-of-the-road approach they could take. I’m just pointing out, there could be reasons why it behooves Apple to allow customers to charge $0.99 for an iTunes single, but maybe not so much to offer a $0.10 enabler …

  • julian:

    It’s also worth noting that a lot of other online stores (such as XBox Live Arcade and Nintendo Wii’s online store) require you to purchase “points” which you then use to purchase your goods. I (and others) strongly suspect this is done precisely to get around the same small-charges problem: You’re forced to buy a bulk set of points which is larger than the credit card processing fee.

  • Blain:

    Also don’t forget that most purchases these days would not be via a single 99 cent credit card charge, even if it is a singleton purchase. There’s a reason that there’s music cards in $15, $25 and $50 denominations, effectively pre-charging or even offloading the credit card processing to a brick and mortar store. Not only that, but one-click, by having a known account, can delay and accumulate charges, so that only after a few weeks, the 10 one-clicks are done as a single $9.90 charge.

Leave a Comment